Three-Peat Projected For Hog Profits

Profits in 2006 will peak near $50 this summer, then slump to a low in the upper $30s in the fourth quarter, predicts University of Missouri agricultural economist Ron Plain. Despite record levels of production in the United States, pork producers have continued to roll in the profits. In fact, producers enjoyed 23 consecutive months of profits in 2004-2005, the longest continuous period of being

Profits in 2006 will peak near $50 this summer, then slump to a low in the upper $30s in the fourth quarter, predicts University of Missouri agricultural economist Ron Plain.

Despite record levels of production in the United States, pork producers have continued to roll in the profits.

In fact, producers enjoyed 23 consecutive months of profits in 2004-2005, the longest continuous period of being in the black since 1989-1991.

Last year's hog slaughter of 103.6 million head was an all-time record, breaking the record set the previous year.

The Agriculture Department is projecting about a 2% growth in pork production in 2006, explains Plain. Market hog slaughter should reach a new high of 104.9 million head, an increase of 1.3% over last year.

He says even though production continues to soar, producer receipts should stay in the black for the third straight year.

Plain suggests there are warning signs for less profitable times ahead:

Pork demand has softened as the high-protein, low-carbohydrate diet craze has faded. The pork industry will lose half of the demand gains it made with the food fad, he predicts. Glenn Grimes, professor emeritus at the University of Missouri, has plotted U.S. pork demand trends since 1970 (Figure 1).

The success of pork exports has been phenomenal, with the United States already recording its 15th-consecutive year in 2005 of record sales (see sidebar on p. 31).

But animal health emergencies can quickly change that trade picture, says Plain, pointing to recent outbreaks of foot-and-mouth disease (FMD) in Brazil and Argentina, and the threat caused by the growing spread of avian influenza. When Taiwan broke with FMD a few years ago, their export market was destroyed, says Plain.

Gilt retention numbers for the last quarter of '05 exceeded sow death loss numbers, signaling the start of sow herd expansion.

The December Hogs and Pigs Report indicated the U.S. breeding herd increased by just 0.7%. “That figure is extremely small by historical standards, but is the largest annual increase since 2000,” reports Chris Hurt, Extension economist, Purdue University. The U.S. breeding herd has been operating in a narrow window of 5.9 to 6.1 million head.

That relatively small expansion equals 42,000 sows. Surprisingly, that growth was centered in the eastern Corn Belt, which led the area in growth with an upsurge of 35,000 sows. Increases were seen in Indiana (20,000), Illinois (10,000), Ohio (10,000) and Wisconsin (5,000). Only Michigan recorded a drop of 10,000 sows.

Hurt speculates it may be the start of resurgence of the U.S. breeding herd in the eastern Corn Belt. In 1990, that area had 27% of the breeding herd, before declining to only 17.2% in 2004.

Canada's $1.65/bu. duty on U.S. corn imports could easily signal a flood of feeder pig imports into the United States, remarks Steve Meyer, president of Paragon Economics. He authors the Market Preview section in North American Preview, the weekly e-newsletter published by National Hog Farmer.

The sudden growth in hog slaughter plants occurring over the next few years in North America will signal excess packing capacity, adds Meyer. When packing industry expansion occurred in 1996-97, hog expansion followed, and with it came some of the lowest hog prices ever recorded (1998-99), he warns.

Slow Hog Expansion

The reasons for slow hog industry expansion, in response to consecutive years of profits, include the difficulty of obtaining building permits and the cost of building construction.

But Plain says today's hog cycle puts producers in a unique position if they want to expand. In the past, when prices were low, producers cut sow herd numbers, leaving some buildings sitting empty, then bringing them back on line with the next round of profits.

That didn't happen in 2002-03, however, because pork producers who weathered the low prices kept their barns full.

When prices finally rebounded, it was due to growth in pork demand and exports, during a period of record hog slaughter, he explains.

“This time, if producers want to expand, there are no empty hog facilities to fill. This time, producers have to pour concrete — and that is a lot tougher proposition than simply restocking facilities,” stresses Plain.

Pork Exports Continue Surge

The U.S. pork industry has recorded its 15th- consecutive year of growth in pork exports in 2005, selling 1.27 million lb. of pork and pork variety meats worth more than $2.5 billion, according to the U.S. Meat Export Federation (USMEF).

Pork exports tallied $2.635 billion last year, more than a billion dollars more than the value of pork exports sold just two years ago, in 2003.

Pork sales to Japan — the number one destination for U.S. pork shipments — rose 13% in volume to 389,321 lb., and 11% in value to $1.088 billion.

After five successive, record-breaking years of sales, U.S. pork exports to the number two market, Mexico, fell 8% in volume (364, 637 lb.) and 9% in value ($513.5 million). Those figures still beat all other sales figures to Mexico except for 2004, say USMEF officials.